Researchers from NIESR said monetary union between two countries of differing size was unlikely to be sustainable

A currency union between an independent Scotland and the rest of the UK would be likely to result in "dollarisation", according to a think tank report.

The National Institute of Economic and Social Research (NIESR) said monetary union between countries of differing size was unlikely to be sustainable.

This would lead to "de facto dollarisation", researchers claimed.

The Scottish government said an expert commission had already detailed how a currency union could work.

The research by the London-based NIESR follows months of debate over the currency Scotland would use if voters back independence in September's referendum.

The Scottish government has long maintained that a currency union between an independent Scotland the rest of the UK would be in the best interests of both countries.

However, Chancellor George Osborne - supported by the main parties at Westminster - disputes this view, and ruled out a formal union earlier this year.

The NIESR report argues that when there is a monetary union between two different-sized nations, there is no incentive for the larger country to impose fiscal constraints on the smaller country.

'No influence'

Researchers concluded: "Scotland would have at most one representative on the Monetary Policy Committee, compared to the rest of the UK having eight.

"It follows that the rest of the UK would dominate every decision and Scotland would have no effective influence on policy.

"Therefore, the Scottish government's fiscal or borrowing decisions could not directly influence monetary policy in the sterling area, which removes the rationale for borrowing constraints on an independent Scotland."

Proposals for a banking union would also be unlikely to work in the long-term, researchers said.

"In the event of a banking crisis south of the border, the size of a potential fiscal transfer from Scotland to the rest of the UK might be so large as to outweigh the benefits from remaining in the banking union," said the report.

"An independent Scotland would therefore have no incentive to participate."

It concluded that even if a monetary union were agreed in principle, without fiscal constraints or a banking union this would resemble "de facto dollarisation", in which an independent Scotland would unilaterally adopt sterling without agreeing to a formal union.

'Detailed proposals'

In response, a spokeswoman for the Scottish government argued that work done by their fiscal commission to ensure the correct arrangements would be in place had not been reflected in the report.

She said: "All of the issues raised by the NIESR in this report have been dealt with in the detailed first report of the Fiscal Commission Working Group, published last year, which considered the post-independence currency options in detail and concluded that a currency union with the rest of the UK is the best option for both Scotland and the rest of the UK.

"Their recommendations include detailed proposals for a sustainability agreement, a stabilisation fund and for ensuring financial stability that will facilitate continued high levels of integration and ensure economic stability is maintained across the sterling area.

"In his speech in Edinburgh, the governor of the Bank England set out the institutional arrangements required for a successful monetary union - these requirements were already addressed by the work of the Fiscal Commission and have not been accurately reflected in NIESR's analysis."

A spokesman for the pro-Union Better Together campaign said: "What we need from the nationalists is some honesty about what would replace the pound.

"Would we rush to adopt the euro or would we set up a separate unproven currency? The idea that Scots can be expected to go to the polls blind on this most fundamental issue isn't credible."

The referendum on independence will be held on 18 September, with voters being asked the yes/no question: "Should Scotland be an independent country?"